Posted tagged ‘virtualworlds’

Raph Koster

(CC) Scott Beale / Laughing Squid

Raph Koster is a MMO designer extraordinarie and the founder of Metaplace, a game-changing startup in the online games space. Raph has an excellent blog that is definitely worth following if you even remotely interested in what makes online social places (games, virtual worlds, social networks) tick. Most recently Raph has come out with two powerhouse posts on improving socializing. They are pure gold:

Amy Jo Kim

(CC) Richard Giles

Meanwhile Amy Jo Kim recently gave speeches on Funware at Google and at Dave McClure’s Startup2Startup evening. I’m a huge fan of her work and it was superb to finally see the video recording of her presentation. She has been sharing her slides, but I believe this is the first time the presentation is available in video. Another pure gold post:

Note: this is part 2 of blog post on VC investments into “Online games and Related Entertainment” segment. See also part 1.

The $1,7 billion top-line figure for “online game-like entertainment” VC investments in years 2007-2008 is a stupendous figure, and more analysis is needed to make sense of it and to see trends within the huge aggregate sum. The analysis on this post focuses almost solely on the Virtual worlds, Casual MMO, social games and casual games sector, as this is the sector in which my company Everyplay operates. My earlier post on this sector was titled “$350 million invested this year“, and with latest data that figure needs to be upped to $481 million.

The doom & gloom of the past month sure to get to any entrepreneur. Luckily, there is one sector that at least can claim to be counter-cyclical (see e.g. Lazard Capital’s and John Doerr’s comments, and NPD reporting 17% year-on-year increase in video game sales in October). There is further proof as this sector attracted ten VC investments in October to the tune of $53 million. Naturally these deals have been set in motion already before the financial crisis, but it’s very encouraging to see these deals close in the face of “R.I.P Good Times“.

Key findings

July 2008 was the biggest “organic” month so far for venture capital investments into virtual worlds, casual MMOs and casual & social games to date. Altogether 11 deals were announced in July totaling $71 million. The month’s investments were led by Zynga’s $29 million and Gaia’s $11 million funding rounds. July was the biggest “organic” month in terms of deals concluded as well as the total size of deals so far. There have been months dominated by huge deals (e.g. $100 million into 9You and $83 million into Big Fish Games), but those are one-offs and need to be excluded when looking at the bigger picture.

The investments in this sector have averaged around $20 million per month for 2007-2008. The investments into the sector continued strongly in October, which was led by $20 million funding for Oberon and $17 million funding for Playfish. The big question is what happens now. The first half of November has been very quiet on VC funding deals. It is likely that July 2008 will keep its peak month status for at least next 12-18 months, but we’ll eventually see larger months because the sector is young. New entrants will continue to flow in and the best growth companies will need further funding to reach their goals.

In the years 2007-2008 most of the VC money flowed into Virtual Worlds (39 deals, $171 million), followed quite closely by casual games and social games/apps. The average deal size at Series A is around $3-4 million, which matches the common wisdom for Series A.

The VCs investing into this sector read like the VC all star list (Benchmark, Accel, Kleiner Perkins, Draper Fisher Jurvetson, Balderton, Sequoia). Accel Partners is the top dog when considering both the number of deals and the size of deals participated in.

Investment rate

The Virtual worlds, Casual MMO and Casual & Social games sector that I’ve analysed in more detail in this post has been very attractive to VCs. The sector investments total an amazing $625 million in years 2007 and 2008 as shown in the diagram:

The $100 million 9You and $83 million Big Fish Games funding rounds skew the investment rate diagram a lot. By excluding them we get to a more “organic” investment rate, that has been averaging around $20 million per month in years 2007 and 2008 as shown in the diagram below:

In this “organic investment rate” diagram there are two major peaks:

July 2008: 11 investments totaling $71 million, led by Zynga’s $29 million and Gaia’s $11 million funding rounds

October 2008: 10 investments totaling $53 million, led by Oberon’s $20 million and Playfish’ $17 million funding rounds

July 2008 shows the peak of investments with most deals and largest sum of money invested. On the face of the current market turmoil, it is very encouraging to see October 2008 to be a very strong month. One reason for October’s strong performance could be that companies are following the advice to “raise money NOW if you can”. If so, we should see a rapid drop off in investments in the coming months. Given that November 2008 is starting to look like a dry month, this might be more true than us entrepreneurs would like it to be. Given the economic downturn I expect July 2008 to remain the biggest organic month for the next 12 months.

Most active VCs

The usual suspects populate the TOP10 lists of the most active VCs and the most heavily investing VCs. When you combine these two TOP10 lists, the most prominent VCs in this space read like the who’s who of venture capital (for comparison, see Fortune’s Midas list and Entrepreneur.com’s TOP100 early stage VC list). The diagram below shows the VC with largest fundings participated in (bars) and largest number of deals (line graph). When reading the table, please bear in mind that the investment bar graph shows the total value of deals the VC company participated in, not the actual amount a particular VC company has invested. So if two VC companies participated in a 5 M$ deal, then both companies are credited in this analysis with 5 M$ as there is no data available on how the investments are split between VC companies.

I’ve shown in the figure above also deals in the related sectors to showcase the VC company’s participation in the total $1,7 billion invested in years 2007-2008. Please note that investments in the related categories (MMORPG and technology etc) are only shown on the table above if the VC company also has made investments in the Virtual Worlds, Casual MMO, Social games and Casual games sector. Thus e.g. Providence Equity Partners that provided $300 million to Zenimax Media (MMORPG) has been omitted.

Accel Partners leads the pack when considering both the number of deals completed and the total value of deals participated in. Accel has been very active investing into developer-operators (e.g. Playfish and GameForge), but has also investments in related sectors (Mochi Media, a game advetising network and Raptr, a social network for gamers). Benchmark Capital is a close second with a large number of deals and almost as high total deal size. Benchmark has also been investing into developer-operators (e.g. Gaia, WeeWorld, Sulake, Grockit).

The figure below shows a selection of the most active VCs and their portfolio companies.

Overall it is clear that the sector has been very attractive to all of the most profilic VC funds in Silicon Valley and London. The companies that are able to attract investment from this all star cast of VCs are definitely on the top of their game.

Note: Balderton Capital is the former European office of Benchmark Capital. Certain deals may be listed under Benchmark, when they might have been done by Balderton (Benchmark Europe).

Distribution of investments by company category

My sector definition encompasses virtual worlds and casual MMOs (persistent, online worlds) as well as social and casual games, which makes the category quite broad. The sub-category that clearly dominates the investments in Virtual Worlds, that has taken the biggest number of deals as well as the largest total sum. Casual games are a close second on deal size thanks to the huge investment (83 M$) into Big Fish Games.

Note: Please see my category definitions to understand how companies have been grouped and important caveats to the methodology.

Social games have been funded very seriously compared to the costs it takes to develop these games. The key reason I can think for the investments of this magnitude that there is a “landgrab” going on. The development costs of social games are neglible compared to the costs of developing a full-blown virtual world or a casual MMO, so the money is going into growing the businesses thru acquisitions and erecting barriers to entry (e.g. by investing into higher game quality). The competition between Zynga and Social Games Network is looking very much like the widget wars between Slide and RockYou. That duel has recently been turned into a three party free-for-all, as PlayFish has in one years time emerged as a very serious contender. With the most recent funding from Accel Playfish has the checkbook to play ball with Zynga and Social Games Network.

Unlike Zynga and SGN, Playfish hasn’t so far purchased any third party games or developers. It’ll be interesting to see who is going to be their first acquisition target, although with several titles in TOP10 on Facebook, they aren’t probably in a huge hurry to go a buying spree.

Average deal size

The average investment size in Series A is around 3-5 M$, which is exactly as you’d expect it to be. The seed rounds are quite large (averages even close to 1 M$ in certain categories), which is probably due to the fact that only high value fundings get the press spotlight, and thus the dataset doesn’t include many of the smaller deals.

Distribution of investments by stage

The Virtual worlds, Casual MMOs and Casual & Social games sector is a young one. The majority of deals (# of deals and value of deals) are made in the Seed and Series A phase.

The list below summaries the deals from years 2007 and 2008 (to October):

Seed: 13 deals, worth 12 M$

Series A: 42 deals, worth 249 M$

Series B: 16 deals, worth 128 M$

Series C & later: 4 deals, worth 44 M$

Undisclosed stage: 27 deals, worth 193 M4

Here are timeline breakouts of the investments per funding stage.

Data spreadsheet

The data on VC investments has been collected from publicly available sources including but not limited to

The data was gathered by Jussi Laakkonen and Adam Martin.The data is most accurate for year 2008. Year 2006 and earlier years have been only covered sporadically and typically only for companies that have received follow-up funding in year 2008. The data is provided AS IS and the authors make no warranties about its accuracy.

Category definitions

Much of the analysis done in this blog post is based on assigning companies to the categories. The companies are assigned to categories subjectively and only using publicly available info (i.e. no research has been done into actual user experience to validate the companies’ claims). Category assignment has been done solely by Jussi Laakkonen and doesn’t represent the opinions of Adam Martin. The categorization part is the weakest and most subjective part of my analysis, so you should take it with a ton of salt.

The categorization uses the terms Virtual worlds, Casual MMO, Social games and Casual games as defined loosely below:

Virtual world

free form play, not a lot of rules

large scale multiplayer, concurrent

some sense of world/place (e.g. rooms, gathering areas)

avatars

persistent world

typical example: Habbo Hotel, Second Life

Casual MMO

gameplay with defined ruleset

shorter sessions, more accessible than full-fledged MMORPG

more mainstream topics (e.g. sports, dance) than typical MMORPG

large scale multiplayer, concurrent or asynch

some sense of world/place (e.g. rooms, gathering areas)

avatars

persistent world

typical example: Maple Story, World Tour Golf

Social game

gameplay with defined ruleset

asynch multiplayer or small scale concurrent multiplayer

utilizes social graph and/or only available on a SocNet

limited or no use of avatars

typically persistent world

typical example: Friend for Sale, Who has the biggest brain

Casual game

gameplay with defined ruleset

single player or very limited asynch/concurrent multiplayer

no use of social graph

no use of avatars

non-persistent world (with the exception of leaderboards)

typical example: Bejeweled, Desktop Tower Defense

What this helpful? Where to dig in?

If you found this data and analysis to be helpful, feel free to shout out in the comments ;-). Also I’d be happy to hear about ideas on further analysis on the data. Any corrections (errors, omissions etc) are more than welcome!

Roughly a month ago I published a list of $350 million invested in year 2008 into virtual worlds, casual MMOs, and casual & social games. The blog post got a lot of coverage when it was published and Adam Martin of T=Machine contributed to the discussion and posted his own list which had a lot of European deals. We decided that the right thing to do would be to put those lists together. I also continued to search for further data and uncovered more deals from e.g. Avista Partners’ monthly video game briefing. I wanted to also see what the total “game-like” segment looked like, so I expanded my criteria to include core gaming MMORPGs, relevant technology providers and ecosystem players (e.g. payment processors). When I had all the data in and summed it up, I was totally and utterly amazed at the massive scale of investments.

Investments total $1,7 billion in years 2007-2008

The Online games and Related Entertainment segment has amassed a truly astounding $1,7 billion of VC investments in years 2007-2008. Of this staggering figure $625 million was invested into the “Virtual Worlds, Casual MMO, Social games and Casual games” sector, $712 million was invested into core gaming MMORPG sector and a further $326 million into related companies (e.g. technology and payment providers).

The diagram below shows the distribution of investments over the years 2007-2008 and the three sectors:

The $712 million invested into MMORPG developers/publishers reflects the high cost to play in this space. The cost of the development of a Triple A core gaming MMORPG starts at $50 million, but can easily skyrocket. The reason these high risk investments continue to be made are the 11 million subscribers of World of Warcraft. WoW’s revenues in year 2007 were $1100 million of which $517 million was pure profit. The lackluster success of recent entrants such as Age of Conan and Warhammer Online underlines how risky taking on WoW is, but despite this the lure of WoW-scale profits will definitely continue to draw entrants.

The data was gathered by Jussi Laakkonen and Adam Martin. The data is most accurate for year 2008. Year 2006 and earlier years have been only covered sporadically and typically only for companies that have received follow-up funding in years 2007-2008. The data is provided AS IS and the authors make no warranties or guarantees about its accuracy.

The data is licensed under the Creative Commons Attribution, Non-Commercial license.

The analysis – tomorrow

A deeper analysis of the VC activity in this segment is available in Part 2 of this blog post. My analysis focuses on the Virtual Worlds, Casual MMO, Social and Casual games sector, as this is the sector in which my company Everyplay operates. Topics covered on Part 2 include:

Monthly investment rates (peak months, current activity)

Most active VCs uncovered

Analysis on investments on company categories, deals stages and deal sizes

I’m currently at Mindtrek, a 700 person conference on all things in digital and social media. The conference has been great so far. Hearing Marc Davis‘ talk about Yahoo!’s approach to web 2.0 and world 2.0 was a great and inspirational opening to the whole event!

On the way to Tampere we world’s first ever Ignite Mobile session (Ignite on a bus!) where I did a presentation about Funware. Slides and further info is now available.

At Mindtrek I did a 20 minute segment on the Business of playing together track talking about the changes in the game industry. I’ll also post that presentation along with the audio track also as soon as I can bend Slideshare to my will ;-).

The panel discussion following the three segments (me, IRC-Galleria‘s Ville Mujunen and Ironstar Helsinki‘s Joakim Achren and host Peter Vesterbacka) was excellent and lasted for more than hour. We had a great audience willing to ask hard questions ranging from policy making in virtual worlds to EULAs to the distinctions between virtual and real items and whether we can have multiple lives (one in a MMO, and then real life persona). Here are some quick’n’dirty notes from the panel

We live in the equivalent of feudal ages in terms of virtual world policy making and EULAs. Virtual World operators are benevolent dictators with pretty much unlimited powers. On the other hand the players have the final power, because the companies try to create revenue from the players, and the only way to do is to please the players. However, in terms of readable EULAs, player representatives in the world management and the rights of players are still highly underdeveloped. The interesting developments in this area include EVE Online’s Council of Stellar Management, The Avatar Bill of Rights, Metaplace’s simple Terms of Use.

Virtual vs. real. This was a great discussion on whether virtual items are as real to use as “real items”. The simple answer is: YES, virtual items are just as real. Brain scanning has been used to show our primal responses to receiving an item are “oooh, shiiny!” regardless whether it is virtual item or real. This really comes back to the values we instill in the culture/world we are in. The gift you get your friend is much more the physical gift. It is a social expression of the feelings and emotions your friend has for you. The on-going credit crunch was also used to highlight how something as real as “money” has become highly virtual. If your bank goes away taking your money with you, your money just became very “virtual”.

Multiple lives vs. roles. It is psychologically impossible for us to have multiple independent personas unless we are schitzophrenic. What we have are roles. I’m a dad, a business man, a colleague, a friend, a leader, a follower, a MMO player etc. I’m still one person and these roles affect each other. It seems there was confusion of the terms at the panel. Regardless of how we call it is clear that we want to have multiple roles to experience different lifestyles, to adapt to different types of social situations, for escapism, for just the fun of experimenting, …

Funware. I’m a big proponent of a funware (the use of game mechanics in non-game applications). I gave highly opionated comments on how funware can be used e.g. the save world thru cutting carbon emission.

Overall Mindtrek has been a blast. It has been great meeting a lot of interesting people from Finnish startups, VCs, game reseachers and academics and other cool people. Just today I sat down with a lunch with a random person only to find out that he is interaction designer, programmer and game developer. Wow, we had an amazing lunch discussion and had so many shared interests to discuss. This is the best part of Mindtrek – it is a truly cross-discipline, international event with really interesting people.

Tracking VC funding deals is a great way to keep a pulse on what’s considered HOT in any given market. VCs start investing when the market starts showing real promise – for major profits in 4-7 year time horizon. As a rule of thumb, VCs are looking for deals where they could make 10x their original investment. So, if there is a number of VCs investing into a segment, you can be sure it is HOT.

Everyplay’s market segment is the mix of social games, virtual worlds, casual MMO and casual games. space. Tracking the VC deals shows continued validation for this market, which what you would expect when the user figures continue to grow very rapidly. Everyplay is also likely to seek out VC funding eventually, so it is important to us to know which VCs are active, what kind of deals are happening and how much money is being raised.

The table shown below is compiled from my own research into these VC deals. It is by no means 100% comprehensive. First caveat: it is rather US focused as the PR machine works best there. VentureBeat, Virtual Worlds Management and the usual suspects TechCrunch, GigaOm, ReadWriteWeb and Mashable do a good job in covering these deals. As Europe is almost completely under-represented and a lot of early stage deals don’t get publicized at all (regardless of where they happen), I’m sure I’m missing a whole of VC deals from this list.

When interpreting the top line figure of $350 million, you should note that half of it was invested into two companies: 9You ($100 million) and Big Fish Games ($87 million). Regardless, it is clear that the VC activity in this space is constant at a roughly “2-5$ million invested a week” level.

Charles River Ventures spoke prominently for this segment, especially their partner Susan Wu did a lot to promote the segment in year 2007. Susan left CRV earlier in 2008 to join Ohai, a stealth online gaming company, and CRV’s public profile has been a lot more quiet since.

SGN and Zynga are locked in a deadmatch to own the social games space. Good for companies looking to be acquired.

EDIT (2008-09-25): I originally reported Sulake‘s investment as 22 M€, which was from Kauppalehti, the leading Finnish business magazine, who had calculated the total losses incurred by Sulake from its founding in year 2000 to end of year 2007 using public records. The Series B and C rounds already amount to 24 M€, and the Seed – Series A is definitely several million euros, so it wouldn’t be a big leap to guess that the total investment would be around 30 M€

EDIT (2008-09-24): I mistakenly reported a series B for Apaja‘s, which hasn’t happened. The table above has been corrected.

I’ve omitted skill gaming, pureplay publishers/operators, core gaming (e.g. like Trion World Network, which has raised over $100 million), middleware and other related industries to try to focus on developers and self-publishing companies.

KZero, a consultancy for virtual worlds, has updated their virtual worlds radar, which is a great distilled view of the whole virtual worlds landscape. The radards are organized by age demographics and demonstrate how the services have developed, their popularity and even suggest possible gaps in market.

TechCrunch50 is over, and Yammer (“Twitter for enterprises”) won the top prize. This was the first time I was actively following the conference and the livestream provided by UStream was simply outstanding. It was a rare opportunity to watch the demos live and listen to the Q&A with the panels.

If you are ever serious about pitching a product to VCs, you should do yourself favour and watch the video recordings available on the TechCrunch50 site. Nothing beats seeing other entrepreneurs doing it for real.

The Rich media and Games tracks were of most interest personally, and the trends of user generated content, collaborative workspaces, virtual worlds with developer APIs and in-browser experiences were obvious in almost every single presentation.

A few quick observations:

PlayCe has a neat idea with the mirror world model, where the 3D game spaces are built from real world data (satellite maps, GIS data etc). It remains to be seen if real world really makes for compelling game play experiences. The downtown of New York isn’t really designed for fast speed racing or Godzilla boss fights.

Atmosphir‘s “build your own 3D platformer” experience was very much an alpha version with plenty of promise. I was frankly surprised that the panel didn’t point out the obvious parallels to LittleBigPlanet, which is polished beyond perfection and due out this fall.

Bojam is collaborative space for musicians around the world. This was a concept with real legs and obvious potential to be used for live jamming, learning from pro players, composing and much more.

There was almost no Nordic participants apart from Burt from Sweden. This made me think. Would I want Everyplay to launch publicly among 50+ other companies coming out of the closet simultaneously? Obviously the group as a whole gets a lot of press, the networking opportunities are immense and if you do well, you are pretty much guaranteed to get a huge influx of users (this happened to Mint, the winner of TechCrunch40). On the other hand it’s pretty expensive for a Nordic company, the competition for attention is intense, and these events take place once a year.

Would I postpone a launch several months just to do it at TechCrunch or DEMO? Or would I show a hastily done alpha just to get it in time for TechCrunch or DEMO?.

No, I wouldn’t. But if the timing would naturally work out, then yeah, it definitely would be worth it.